The Market’s Finally Looking Up: Will It Last?

by: March 16, 2012

The stock market hit some major milestones this week: The Standard & Poor’s 500 index reached its highest level in more than three years, the Dow Jones industrial average settled in above 13,000 and the Nasdaq rose to its highest level in 11 years. Still, the Federal Reserve has been warning not to get too excited about where the economy is headed next.

David Kotok, chairman and chief investment officer at Cumberland Advisors, says there are a bunch of reason for stocks to be rising.

“Europe didn’t collapse — that was one,” Kotok says. “We see improving employment statistics — the most recent one is this week’s initial unemployment claims.”

Those numbers showed fewer people were asking for unemployment benefits, which is a good sign. Earlier this week, the Fed announced that most big U.S. banks passed its stress test, encouraging investors. And to top it all off, retail sales are on the rise, showing stronger consumer demand.

But when stocks rise so much, so fast, it always begs a question: Have they overshot on the upside? Can they maintain their current levels?

“I think we appreciate that sentiment,” she said, “because at the end of the day the perception will impact trading and then perception becomes reality.”

But Patterson says she thinks these gains are sustainable. She says stock values were depressed to very low levels in recent years because of all the panic over economic trouble around the globe.

Kotok agrees, noting that we’ve been in a bull market since last October and “it looks like it has more to go.” He says stocks overall don’t look overpriced given the improvement in the U.S. economy.

Still, there are plenty of reasons to be concerned about where the economy is headed next. For one, the most important institution watching the recovery, the Federal Reserve, has not been sounding very optimistic. Fed Chairman Ben Bernanke recently warned lawmakers in Congress that the economy is still pretty weak.

“The recovery of the U.S. economy continues, but the pace of the expansion has been uneven and modest by historical standards,” he said.

So while the unemployment rate may have dropped quite a bit to get to February’s 8.3 percent, the anemic growth in GDP could still mean that the jobs recovery will sputter.

Robert Shimer, an economist at the University of Chicago, also sees a long road ahead. He says at this pace, it will take eight years for the economy to get back to normal.

“But during that period there’s a good risk that something bad happens, just because unexpected bad things have always happened,” he says. “And that means that we’re going to be, you know, losing a lot more jobs.”

Patterson and Kotok don’t foresee quite so bleak a future. Kotok predicts that a few years down the road, the economy will be in much better shape. But both acknowledge that there are always risks out there, the biggest right now being rising gas prices.

“In terms of what could stop this job creation from getting some real momentum … oil in my mind is the No. 1 risk to watch,” Patterson says. “The good news is it’s not Europe anymore, but it’s been replaced — Greece has been replaced by the Middle East.”

Still, barring a serious conflict with Iran or some other surprise that sends oil prices much higher, Kotok and Patterson say the economy and the stock market will keep improving.

“I’m feeling better about it than I did three months ago,” Patterson says. And given the last few years, that’s probably the best anybody could hope for.